Lowering interest rates, buying treasury bonds and putting money back into the economy are not just ideas being bantered around anymore. These are realities at work in the U.S. today. We hear about the Federal Reserve Board in the news, and the media makes a big deal about the meetings that are held.
Yet, when it comes to The Fed and its activities, investors are largely unsure about its significance or consequences.
In order to provide some understanding of our central bank, here are several terms to understand regarding The Fed:
Monetary Policy: The actions taken by The Fed to control the availability and cost of money and credit to help promote national economic goals.
Fed Funds Rate: The interest rate that depository institutions will lend their balances that are held at The Fed to other depository institutions on an overnight basis.
Federal Reserve Board of Governors: Located in Washington,D.C. It is a seven member board overseeing the actions of The Fed.
Federal Open Market Committee (FOMC): Made up of the seven members of the Board of Governors and five of the bank district presidents. FOMC decides the short-term objective for open market operations.
Easy Money: Increased money supply through lower interest rates (Fed Funds) that is designed to encourage lending and economic activity.
Tight Money: Decreased money supply through raised interest rates (Fed Funds) to temper and fight inflation.
Recently, we have witnessed what The Fed terms Open Market operations and Fed Funds rate adjustments. The actions taken by The Fed have been in response to a recessionary and recovering economy. This has resulted in historically easy money with the hope for future economic development.
You may ask, “How does this affect me?” Simply, a broad understanding of the actions of The Fed encourages investors in two ways:
Helps reduce the fear of different types of actions taken by The Fed.
Empowers investors to continue investing along their long-term plan.
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This article was published in the Founders FCU's Open Exchange Newsletter (October 2009). It was written by Derek Hawk, Financial Consultant with Founders Investment Services Team.